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Productivity grows at fastest pace in two years

U.S. productivity rose at an annual rate of 4.7 percent during the third quarter, the Labor Department reported Tuesday.
/ Source: The Associated Press

The productivity of American workers shot up at the fastest pace in two years during the July-September quarter, helping to ease fears that inflation pressures were threatening to get out of hand.

The Labor Department reported Tuesday that productivity, the key component for rising living standards, rose at an annual rate of 4.7 percent during the summer, a big upward revision from the 4.1 percent initial estimate made a month ago.

The big jump in worker efficiency help to push labor costs down by 1 percent at an annual rate in third quarter, double the 0.5 percent drop in unit labor costs that had originally been reported. The stronger productivity and falling labor costs should help ease fears at the Federal Reserve that overall inflation was on the verge of worsening because of rising wage pressures.

Productivity is the key factor that determines whether living standards are improving. Gains in productivity allow companies to pay their workers higher salaries from their increased production without having to increase the price of the products they sell, which would fuel inflation.

The Fed is closely monitoring productivity and unit labor costs as it determines how fast it needs to boost interest rates to keep inflation from appearing.

Good gains in productivity and small increases in labor costs have allowed the central bank to boost interest rates at a gradual pace over the past 18 months. Analysts are looking for two more quarter-point rate hikes in December and January, the final two meetings for Chairman Alan Greenspan. And they believe his designated successor, Ben Bernanke, will keep raising rates at least in the early months of his tenure.

The 4.7 percent rate of increase for productivity in the third quarter was sharply higher than the 2.1 percent increase for the April-June quarter. It was the best showing since a 9.6 percent surge in the third quarter of 2003.

The 1 percent drop in unit labor costs marked the second consecutive quarter that labor costs have fallen after three quarters of big increases that had raised worries that wage pressures were beginning to mount. Unit labor costs declined at a 1.2 percent rate in the second quarter.

The upward revision in productivity reflected the fact that the government last week revised upward overall economic growth for the third quarter to an annual rate of 4.3 percent. It had originally estimated that the gross domestic product was growing at a 3.8 percent rate in the third quarter.

The increased amount of output meant that workers had produced more per hour of work than originally estimated.

President Bush, battling the lowest approval ratings of his presidency, is seeking to draw attention to a spate of recent indicators showing that the economy has regained its footing following the blows from the Gulf Coast hurricanes and a surge in energy prices.

In a North Carolina speech on Monday, Bush declared that “this economy is strong and the best days are yet to come for the American economy.”

In addition to the solid upward revision to GDP and productivity, the government on Friday reported that employment grew by a solid 215,000 in November, ending a two-month lull which had reflected sizable layoffs in New Orleans and other areas along the Gulf Coast where businesses had been devastated by hurricanes Katrina and Rita.